Knishes and Taxes
A cautionary tale

JUN 08, 2012, VOL. 17, NO. 38 • BY IRWIN M. STELZER

via The Weekly Standard

This is a tale of knishes, taxes, and conservatives’ hopes to replace income and capital gains taxes with a national sales tax on consumption. Like all those who preside over national treasuries, Britain’s chancellor of the exchequer, George Osborne, has a deficit that needs closing. Unlike other financial-men-in-charge, he would wisely rather not tax work and risk-taking, and so in his latest budget he cut the highest marginal tax rate from 50 percent to 45 percent.

To fill part of the revenue hole, he decided to extend the VAT, or Value Added Tax, essentially a national sales tax beloved of Europe’s politicians, to a favorite of Britain’s moderate-income consumers, the hot pasty (pronounced pass-tea). Think knish—some sort of stuffing wrapped in dough. The chancellor reckoned that the tax, at a rate of 20 percent, would produce about $160 million. Unfortunately, the leadership of the coalition government, dominated by the Tory party, includes many with inherited wealth, educated in private schools and not among leading consumers of pasties. Their political vulnerability to a Labour party round of class warfare somehow escaped the proponents of this new levy.

In response to the uproar, a new set of regulations was crafted. In effect, the government changed the definition of “hot.” Pasties in warming units in supermarkets will still be taxed at a 20 percent rate, but hot pasties left out to cool—“to return to ambient temperatures,” as revenue-gatherers put it—will remain exempt from the tax. Note that the pasty need not be at any specified ambient temperature, merely in the process of approaching an unspecified ambient temperature. Sheryll Murray, Conservative MP for South East Cornwall, told the government, “I didn’t want to see an army of thermometer-wielding tax inspectors poking our pasties.”

Consumption Tax

If you think this idea emerged from the brain of some bureaucrat, no K Street-style lobbying needed, think again. Greggs, the U.K.’s largest bakery chain, gathered more than 300,000 signatures on a petition to change the definition of “hot,” and enlisted the National Association of Master Bakers and Cornish Pasty Association in its lobbying effort. Greggs’s CEO, Ken McMeikan, met with Treasury officials to suggest “a very sensible way forward for the government.” The Treasury’s adoption of the “sensible way forward” produced a 9 percent jump in Greggs’s shares.

This is only one example of many that attest to the complexity of consumption taxes and the lobbying efforts such taxes attract. Conservatives might have many good reasons for favoring such taxes—taxing spending, not earnings from work, being the most cited—but simplicity and the creation of a glut of abandoned offices on K Street should not be among them. Because consumption taxes are regressive—they claim a larger portion of the incomes of lower- than of higher-income consumers—all sorts of exemptions get built in to exempt some purchases from tax….READ MORE